Originally published February 15, 2012 at 6:39 PM | Page modified February 16, 2012 at 8:25 AM
Chaos in Congress keeps state sales-tax deduction up in the air
The latest deal in Congress for a payroll-tax holiday still leaves Washington residents wondering if they'll be able to deduct sales taxes on their 2012 federal income-tax returns.
Seattle Times Washington bureau
WASHINGTON — David Stover, of Seattle, was preparing to tackle his 2011 tax return when a question stumped him: Had or hadn't Congress passed the sales-tax deductions for residents of Washington and other states without individual income taxes?
Congress had.
What it has failed to do, however, is renew the provision for 2012 and beyond.
The latest deal on a payroll-tax holiday, hammered out this week by a House-Senate conference committee, apparently does not include an agreement to extend sales-tax deductions and a host of other tax breaks. That leaves unsettled whether Stover and other Washington residents will be able to write off taxes on purchases made this year.
And if history is any guide, residents of Washington and seven other states could be stuck in limbo for a while.
Ever since Congress enacted the option in 2004 for taxpayers to deduct state and local sales taxes in lieu of state income taxes on their federal returns, the provision has lurched from one temporary renewal to another. The deal expired at the end of 2009, and Congress waited 12 months before retroactively renewing it through 2011.
Congress let it lapse again in December while Democrats and Republicans wrangled furiously over a two-month stopgap agreement over Social Security tax reductions and extended unemployment benefits for the long-term unemployed. This week, Congress largely forged a deal to extend those tax breaks through the rest of this year — but left out deductions for sales taxes, tuition, tax credits for clean energy and six dozen other tax breaks.
It was all too much for Stover. A retired school social worker, Stover moved from Ann Arbor, Mich., last April to live closer to his son's family. Stover wanted his Michigan tax preparer to handle this year's return, but feared that she and he weren't up to date on the convolutions affecting filers from Washington.
"It's so confusing. It's no way to run a government," said Stover, who was befuddled enough to seek tax guidance from a reporter.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming also do not tax most income. New Hampshire has neither an income tax nor a general sales tax.
Lawmakers from affected states have pushed hard to write the sales-tax deduction permanently into the tax code.
Sen. Maria Cantwell, D-Wash., who sits on the Senate Finance Committee, has sponsored a bill to do just that. But that legislation — along with three similar proposals introduced last year — has stalled in committee.
A majority of Washington's congressional delegation has signed on as co-sponsors on one or more of the bills: Democratic Sen. Patty Murray and Reps. Jay Inslee, D-Bainbridge Island; Jim McDermott, D-Seattle; Rick Larsen, D-Lake Stevens; Dave Reichert, R-Auburn; Cathy McMorris Rodgers, R-Spokane; Doc Hastings, R-Pasco, and Jaime Herrera Beutler, R-Camas.
Nick Kasprak, a tax analyst with The Tax Foundation, a Washington, D.C., education group, estimates allowing sales-tax deductions costs the Treasury $2 billion to $3 billion a year. That's relatively little compared to extending the Bush-era tax cuts, which costs the federal government $200 billion in lost revenue annually.
But the price tag might be just big enough, Kasprak said, to make it politically more palatable to renew it in one- or two-year increments.
Former Democratic Rep. Brian Baird, who tried to make sales-tax deductions permanent before retiring in 2011, says the issue is one of simple fairness and parity.
But putting the sales-tax deduction into the tax code would entail getting a cost analysis from the Congressional Budget Office, which usually presents the score as a 10-year price tag. Besides, Congress and President Obama are debating overhauling the entire tax code, including possibly eliminating deductions for mortgage interests, state income taxes and a host of other cherished tax breaks.
"I think it should be our goal to make it permanent as Maria (Cantwell) and I consistently advocated," Baird said. "But given scoring and fiscal issues, that's not likely anytime soon."
Kyung Song: 202-662-7455 or ksong@seattletimes.com
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